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Labor Markets and the Demand for Foreign Direct Investment

Sonal S. Pandya

International Organization / Volume 64 / Issue 03 / July 2010, pp 389 - 409

DOI: 10.1017/S0020818310000160, Published online: 19 July 2010

Link to this article: http://journals.cambridge.org/abstract_S0020818310000160

How to cite this article:

Sonal S. Pandya (2010). Labor Markets and the Demand for Foreign Direct Investment. International Organization, 64, pp
389-409 doi:10.1017/S0020818310000160

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Labor Markets and the Demand for
Foreign Direct Investment
Sonal S+ Pandya

Abstract Existing research on foreign direct investment ~FDI! focuses on how

politics influences the supply of FDI inflows+ In this article I shift focus to the demand
for FDI inflows within recipient countries by examining individual preferences for
FDI+ I argue that FDI preferences are largely a function of FDI’s effects on income+
FDI raises wages, especially those of skilled labor because foreign firms require
more highly skilled labor than their local counterparts+ Accordingly, support for FDI
should increase with respondents’ skills+ Using three years of extensive public opin-
ion data from eighteen Latin American countries, I provide robust evidence that
preferences are consistent with FDI’s effects on income+ There is relatively little
support for alternate explanations including concerns about job security, opposition
to privatization, and the socializing effects of higher education on economic policy
preferences+

Political economy research has only begun to tap into the richness and complexity
of foreign direct investment ~FDI!+ FDI plays a central role in many aspects of
international economic integration+ It is the single largest source of global capital,
in some years worth more than all other forms of capital flows+1 It drives other
types of economic flows+ For example, intrafirm trade—trade between subsidiar-
ies of a single multinational firm—constitutes over one-third of total world trade+2
FDI can also foster economic development by creating jobs and introducing new
technologies+3 Existing political economy scholarship on FDI emphasizes how polit-
ical risk influences where multinational firms choose to invest+ For example, cur-
rent research shows that countries with lower risk receive higher volumes of FDI;
debate in this literature centers on which domestic political conditions make mar-

For helpful suggestions I thank David Leblang, and the editors and reviewers of International Orga-
nization+ Randy Akee, Jeff Frieden, Torben Iversen, Catherine Thomas, Robert Urbatsch, and Alex
Wagner provided invaluable feedback on an earlier version+ I gratefully acknowledge the support of
the Niehaus Center for Globalization and Governance at Princeton University+ The usual disclaimer
applies+
1+ World Bank 2003+
2+ See Hummels, Ishii, and Yi 2001; and Yi 2003+
3+ For discussion of the conditions necessary for FDI to promote economic growth, see Romer 1993;
Borensztein, De Gregorio, and Lee 1998; and Alfaro et al+ 2004+

International Organization 64, Summer 2010, pp+ 389–409

© 2010 by The IO Foundation+ doi:10+10170S0020818310000160
390 International Organization

kets appealing to foreign investors+4 These studies model the choices of multi-
national firms to provide political economy explanations for the supply of FDI
inflows+ Although this is an important topic, it is only one dimension of FDI’s
politics+
In this article I focus on the demand for FDI+ Specifically, I develop and test a
theory of individual preferences for FDI inflows, arguing that preferences are a
function of FDI’s distributional effects+ In FDI, multinational firms establish for-
eign subsidiaries to produce goods and services abroad+ These activities redistrib-
ute income within recipient countries by driving up labor demand+ FDI increases
the supply of productive capital+ Foreign firms create additional labor demand by
hiring local labor; consequently wages rise+ Skilled labor wages, in particular, rise
because multinational firms are typically more technologically advanced and require
more skilled labor than equivalent local firms+ Given these distributional effects
of FDI inflows, I hypothesize that labor supports FDI inflows and that this support
is greater among individuals at higher skill levels+
I test these claims with three years of data from the Latinobarometer, a public
opinion survey covering eighteen Latin American countries and perhaps the only
major, multicountry survey project that inquires about attitudes toward FDI+ These
data allow me to test the observable implications of FDI’s distributional effects
for individuals’ preferences+ I show that FDI preferences are indeed consistent with
FDI’s expected effect on individual income+ Specifically, support for FDI inflows
increases with respondents’ skill level+ Respondents with a university education
are between 7 to 10 percentage points more likely to support FDI inflows than
respondents with less than a secondary school education+ This finding is robust to
a variety of alternate explanations including the socializing and informational effects
of education, job insecurity, and opposition to privatization+
By opening up a new dimension to FDI research, these findings make two
broader scholarly contributions+ First, they build the foundation for a broader theory
of FDI demand+ Preferences underlie more aggregate phenomena including lob-
bying for FDI policies, the existence and form of national FDI regulation, and
choices about international cooperation on investment+ These are all aspects of
FDI’s political economy about which little is known, even though these are cen-
tral questions in the study of other types of international economic flows+5 Aware-
ness of the demand side of FDI’s politics may prompt a reassessment of extant
findings on FDI supply; the volume of FDI inflows may have as much to do with
demand for FDI as with investors’ willingness to supply investment+6 More gen-
erally, existing accounts of the political economy of international economic inte-

4+ See Henisz 2002; Jensen 2003; and Li and Resnick 2003+ An earlier generation of research, strongly
influenced by dependency theory, argued that variation in FDI inflows is due to the ease with which
governments can expropriate investments+ See Vernon 1971; and Kobrin 1987+
5+ Studies of American FDI regulation by Kang 1997 and Crystal 2003 are notable exceptions+
6+ Pinto and Pinto 2008 incorporate this insight in their claim that partisan preferences for FDI can
influence investors’ perceptions of risk and thereby the volume of inflows+
 Labor Markets and Demand for Foreign Direct Investment 391

gration are, at best, incomplete without greater attention to the politics of FDI
support+
Second, these findings contribute to research on individual preferences for inter-
national economic flows+ The use of survey data to validate theories of distribu-
tional effects is increasingly common and has already provided new insights on
preferences for trade, immigration, macroeconomic policy, and social spending+7
Existing research identifies a role for nonmaterial sources of trade policy prefer-
ences including national pride and socialization through higher education+ FDI likely
has even more potential to ignite nationalist opposition than trade+ It can give for-
eigners a high profile in the national economy as large employers and custodians
of natural resources and national infrastructure+ Recent years have seen takeovers
by multinational firms singled out as affronts to national identity in countries from
Bolivia and South Korea to the United States+ As such, FDI is a particularly apt
policy area in which to test the relative importance of material and nonmaterial
sources of international economic policy preferences+8
The remainder of this article is organized into three main parts+ The next sec-
tion develops hypotheses about the sources of individual preferences of FDI inflows+
I then describe the empirical test of these hypotheses and a series of robustness
checks+ The article concludes with the implications of the article’s findings for
public policy and a broader research program on the politics of FDI regulation+

Sources of Foreign Direct Investment Preferences

Three facts about FDI help to establish FDI’s economic implications for recipient
countries+ First, FDI is the international flow of firm-specific capital+ These firm-
specific assets include proprietary production technologies, managerial and orga-
nizational practices, and trademarked brands+ Multinational corporations arise when
firms encounter incomplete contracting problems in directly selling or licensing
these assets+ Additionally, holdup risk is high when a separate firm is an exclusive
inputs supplier+ FDI avoids these pitfalls by keeping assets within the firm and
expanding the firm itself into multiple markets+9
Second, FDI is so expensive that only the world’s most productive firms under-
take it+ FDI requires firms to establish and monitor multiple subsidiaries, often in

7+ On trade policy, see Balistreri 1997; O’Rourke and Sinnott 2001; Scheve and Slaughter 2001b;
Mayda and Rodrik 2005; Hainmueller and Hiscox 2006; and Baker 2005+ On immigration, see Scheve
and Slaughter 2001a; Mayda 2006; and Hainmueller and Hiscox 2006+ See Scheve 2004 on inflation;
and Iversen and Soskice 2001, on social policy+
8+ Fayerweather 1982; and Domínguez 1982 examine FDI attitudes among business and political
elites+ Scheve and Slaughter 2004 examine the effect of FDI on perceptions of job security; I discuss
this argument in detail below+
9+ See Hymer 1976; and Antràs 2003+ Multinational firms resolve incomplete contracting problems
by allocating residual rights of control, those rights which are not ex ante contractable, to the parent
firm ~Grossman and Hart 1986!+
392 International Organization

distant and initially unfamiliar markets+ FDI is efficient for only those firms whose
exceptionally high productivity offsets the costs of multinational production+ For
example, Helpman, Melitz, and Yeaple find that multinationals are 15 percent more
productive than purely domestic, exporting firms+10 I make use of this fact in deriv-
ing FDI’s distributional effects by assuming that multinational firms are more pro-
ductive than local firms in the host market+
Third, there are two distinct strategies for organizing multinational production+
Like all forms of capital flow, FDI is a way for firms to earn higher returns on their
capital+ Owners of firm-specific capital, however, are unable to “lend” their capital
due to various incomplete contracting problems+ Instead, these firms earn returns
to their assets indirectly via product markets+ There are two different ways in which
firms can organize production to realize these returns+ Firms lower production costs
by pursuing export-oriented FDI that fragments the production process+ Firms usu-
ally retain headquarter functions such as research and development in the home
country and relocate production to foreign countries abundant in necessary inputs,
typically labor+11 Market-oriented FDI sees firms entering countries that are poten-
tial product markets+12 This form of investment replicates production facilities in
multiple host countries to produce goods and services for local sale+13 Firms pur-
sue this strategy when trade barriers or transport costs make cross-border trade pro-
hibitive+ For example, American restrictions on Japanese auto imports in the 1980s
prompted major Japanese carmakers to establish manufacturing plants within the
United States+ Market-oriented FDI accounts for the majority of FDI flows+ In the
late 1990s, foreign subsidiaries of U+S+-based multinationals sold approximately two-
thirds of their output in the same host country in which they produced it+14 This
figure is actually a historic low, because export-oriented FDI grew considerably in
the 1990s+ Any account of FDI’s distributional effects has to make sense of both
its factor price effects and, when relevant, product price effects+

FDI’s Distributional Effects

A specific factors model provides an instructive framework in which to analyze

FDI’s distributional effects+ The model consists of two industries and three factors—

10+ Helpman, Melitz, and Yeaple 2004+

11+ Helpman 1984+ FDI in the primary sector is sited near resource deposits+ Due to the unique
features of FDI into the primary sector—it has exceptionally large economies of scale and is very
capital intensive—the distributional implications presented here are less likely to hold+
12+ There are finer-grained distinctions between types of FDI but they can all be accurately classi-
fied into one of these two categories+ Multinationals enter host countries through the establishment of
new production facilities, or the merger and acquisition of an existing firm+
13+ Markusen 1984+
14+ These data are from the Bureau of Economic Analysis’ Survey of Direct Investment Abroad, the
standard source for disaggregated data on multinational production+ See Hanson, Mataloni, and Slaugh-
ter 2003 for further details on trends in export- and market-oriented FDI+ Broad trends in these data are
taken to be representative of the universe of multinational firms, not just those based in the United States+
 Labor Markets and Demand for Foreign Direct Investment 393

capital specific to each of the two industries and homogenous, mobile labor+15 The
assumption of industry-specific capital is apt since physical machinery and pro-
duction practices cannot be easily redeployed across industries+ There is also full
employment of all factors and all firms are price-takers+ Profit-maximizing firms
hire workers until the marginal revenue product of the last worker hired is equal
to that worker’s wage+ The marginal revenue product of labor is the revenue gen-
erated by each additional worker employed by a firm+ The central determinant of
marginal revenue product is productivity; all else equal, variation in marginal rev-
enue product depends on how much a given worker can produce+
Consider the distributional effects of firm-specific capital inflows+ To isolate this
effect, assume that FDI does not affect local product prices+ This is true of export-
oriented FDI in which multinationals export goods rather than selling them locally+
In the context of the model, FDI introduces new capital into one of the two local
industries+ Local workers become more productive because their marginal rev-
enue product increases with additional capital inputs+ The exceptionally high pro-
ductivity of multinational firms magnifies this effect because these firms typically
introduce more efficient production technologies than do local firms+ At this higher
marginal revenue product the multinational firm expands production, hiring work-
ers away from local firms by offering a higher wage+16 Firms re-establish the equal-
ity of wages and marginal revenue product at this higher wage+ Since labor is
mobile across industries, these gains accrue to all labor, not just those employed
by multinational firms+ These wage increases represent gains in real income because
product prices are unchanged+ Returns to domestic capital owners decline because
a portion of capital income is redistributed to labor in the form of higher wages+
A wealth of evidence demonstrates that FDI increases wages+ That foreign-
owned firms pay higher wages than their domestic counterparts is an exception-
ally robust finding in the context of both developed and less developed economies+17
Most studies find between a 10 and 30 percent wage premium for unskilled work-
ers in foreign-owned manufacturing firms+ Additionally, wages paid by local firms
increase after the entry of multinationals+ Blonigen and Figlio examine the effects

15+ Jones 1971+ Unlike trade, there are no widely agreed-on general equilibrium models of FDI
flows that specify the distributional effects of FDI inflows+ For discussion of the controversies sur-
rounding such models, see Carr, Markusen, and Maskus 2001; and Blonigen, Davies, and Head 2003+
16+ The capital-intensive nature of multinational production raises the possibility that FDI reduces
overall labor demand by introducing labor-saving technologies+ In export-oriented FDI, this result can
obtain only if multinational firms systematically underinvest because their production is for export and
therefore not constrained by local demand+ In market-oriented FDI, this is a possibility only when
local product demand is sufficiently price inelastic that demand remains constant following a price
reduction+ A possible exception is the natural resources sector+ If exclusively local firms exist in this
sector ~and often they do not! the difference in capital intensity of local and foreign-owned firms’
production technologies can be exceptionally large+
17+ Multinational firms may also pay efficiency wages to mitigate their higher labor search costs+
See Lipsey 2002, for a comprehensive review of evidence on the labor market effects of FDI inflows+
Key country studies include Haddad and Harrison 1993; Harrison 1996; Aitken, Harrison, and Lipsey
1996; and Lipsey and Sjöholm 2002+
394 International Organization

of FDI on local wages in South Carolina and find that the entry of a single average-
sized, foreign-owned plant, employing about 190 workers, increases by 2+3 per-
cent of the real wages of all workers employed in the plant’s industry and county+18
This wage increase, they argue, reflects an overall increase in labor demand+ Sim-
ilarly, Feenstra and Hanson identify a close association between FDI inflows and
wage increases in Mexico in the 1990s, with the highest wage increases observed
in those states receiving the highest volumes of investment+19 In many developing
countries, local firms pay higher wages after the entry of a foreign-owned firm
despite constant or even decreasing productivity+20 These results support the theo-
retical claim that FDI inflows lead to higher wages via its effect of raising labor
demand+
Market-oriented FDI has the additional effect of introducing competition into
the local product market+ Given that multinational producers are typically more
productive than their host country counterparts, market-oriented FDI can result in
lower product prices through greater market competition+21 The precise effect can
range from neutral ~that is, FDI has no influence on product prices!, to price reduc-
tions whose magnitude depends on the degree of market competition that FDI intro-
duces+22 For labor, any price reductions are an additional channel through which
FDI increases real income+23
There is considerable evidence that returns to FDI increase with skill level+ Recall
that firms’ fundamental motivation to undertake FDI is to protect firm-specific pro-

18+ Blonigen and Figlio 2000+

19+ Feenstra and Hanson 1997+
20+ Görg and Greenway 2001+
21+ Although there is the theoretical possibility of collusion between multinational and domestic
firms to keep prices high, in practice this does not happen+ Asymmetries in cost structures between the
two groups make it difficult to sustain collusion+
22+ Market-oriented FDI can also contribute to consumer welfare by increasing product variety+
23+ It might be argued that consumption effects are an independent source of policy preferences+
Consumption-based theories of trade preferences get traction from a decrease in factor prices coupled
with an increase in consumer welfare: support for trade can be attributed to consumption preferences
when factor income is expected to decline ~Baker 2005!+ FDI cannot yield this configuration of income
effects; wages rise regardless of the relative abundance of labor in the host country+ Consumption
effects range from neutral for export-oriented FDI to positive for market-oriented investments+ For the
purposes of this study, this means that factor price and product price effects cannot be disentangled as
independent sources of labor’s FDI preferences+ There are theoretical reasons to expect capital owners
to lose income following FDI+ In a constant-returns-to-scale model such as the specific factors model,
an increase in wages is a redistribution of local capital income to labor+ In an increasing-returns-to-
scale model, the introduction of an additional product variety reduces local firms’ market share, thus
increasing their average total cost+ It also shrinks markups over marginal cost+ In the longer term,
however, there is potential for positive productivity spillovers to local firms+ Ambiguity arises in empir-
ical work because these two sets of effects are difficult to separate+ Aitken, Harrison, and Lipsey 1996
show net negative productivity effects of FDI for Mexico, Venezuela, and the United States suggesting
that the capital owners are net losers+ Blonigen, Davies, and Head 2003; and Chari and Gupta 2008
show that FDI inflows reduce profits accruing to local producers+ Sembenelli and Siotis 2008 show
that, in the short-term, Spanish firms’ markups decline following FDI into their industry+ In the long-
term, however markups increase in research and development intensive industries—those industries
most likely to receive positive technological spillovers from FDI+
 Labor Markets and Demand for Foreign Direct Investment 395

duction technologies+ By virtue of these technologies, production processes in multi-

national firms tend to be more advanced than those of equivalent domestic firms+
For this reason, multinational firms systematically demand more highly skilled
labor than do local firms+ From this fact follows the prediction that labor’s gains
from FDI inflows increase with skills+ Extensive evidence shows that, consistent
with this hypothesis, FDI inflows have a particularly large effect on skilled labor
wages+24 Estimates of FDI’s effects on skilled labor wages are as high as 50 to 70
percent above skilled wages paid by local firms+25 Griffith and Simpson directly
compare skilled and unskilled wages in UK manufacturing industries to find that
the wage premium associated with multinational employment is twice as large for
skilled workers compared to unskilled workers+26 Feenstra and Hanson conclude
that FDI was the single largest source of increases in skilled labor wages in Mex-
ico during the 1980s+27
The theoretical and empirical findings on FDI inflows have clear implications
for labor’s FDI preferences+ Both factor price and product price effects suggest
that labor will support FDI+ FDI increases wages by increasing labor demand; wage
increases are higher for skilled labor due to the relatively high skill intensity of
multinational firms’ production processes+ Accordingly, labor is likely to support
FDI inflows because it increases labor’s real income through higher labor demand
and, sometimes, lower product prices+ Skilled workers have a higher probability,
all else equal, of supporting FDI inflows since skilled wages receive the largest
gains from FDI+

Alternate Mechanisms
Preferences are, of course, complex and multidimensional+ Empirical tests must
account for other potential sources of FDI preferences+ Recent research on trade
and immigration attitudes suggests that preferences are not exclusively a function
of expected income effects+ Mayda and Rodrik, and O’Rourke and Sinnott find a
robust positive relationship between national pride and protectionist prefer-
ences+28 Hiscox and Hainmueller propose that higher education uniquely social-
izes individuals to have more cosmopolitan preferences by fostering an awareness

24+ Many detractors of FDI into developing countries contend that workers face sweatshop labor
conditions, which, if true, might make labor less inclined to support FDI+ Much of this perception is
due to the conflation of FDI and outsourcing—the relocation of production abroad to separate firms+
Outsourcing tends to occur in less technologically intensive production in which firm-specific assets
are not vulnerable to incomplete contracting problems+ Graham 2000; and Brown, Deardorff, and Stern
2003 review evidence on working conditions in foreign-owned firms to find that foreign-owned firms
consistently provide superior working conditions compared to local firms+
25+ See Haddad and Harrison 1993; and Lipsey and Sjöholm 2002+ Following Berman, Bound, and
Griliches 1994, most studies of FDI’s effects on skilled wages proxy for skilled labor by using wage
data for nonproduction workers employed in manufacturing industries+
26+ See Griffith and Simpson 2001; and Griffith 1999+
27+ Feenstra and Hanson 1997+
28+ See Mayda and Rodrik 2005; and O’Rourke and Sinnott 2001+
396 International Organization

and appreciation of foreign cultures and influences+ Higher education, they con-
tinue, also provides the requisite economic literacy to appreciate the welfare gains
to free trade independent of the narrow effects on individual income+29 These pro-
posed effects of higher education on preferences are independent of the effect of
higher education on skills+
Another possible influence on preferences is perceived job insecurity+ Scheve
and Slaughter argue that FDI can increase the elasticity of labor demand in host
countries, thereby fueling job insecurity+30 Although they do not address FDI pref-
erences directly, their finding suggests that individuals who perceive their jobs to
be less secure may be less favorable toward FDI+ This mechanism is distinct from
the distributional one but it is not necessarily inconsistent+
The finding may not generalize because FDI can also be a source of job stabil-
ity, especially in times of economic crisis+ Multinational firms are more resilient
to economic shocks than purely domestic firms in the host country+ As part of a
larger multinational organization, affiliates have easier access to credit and more
diversified portfolios that make them more likely to stay in operation than domes-
tic firms who cannot call upon the resources of a parent firm+ Indeed, FDI flows
often increase following currency devaluations+31 In short, the role of job security
in the formation of FDI preferences is an open empirical question+
Another dimension of FDI’s income effects is FDI’s potential to eliminate rents
accruing to labor+ Privatization is frequently the context for these effects+ In many
countries the successful privatization of state-owned firms requires the participa-
tion of foreign-owned firms+ Foreign firms alone can bring the necessary financ-
ing and production technologies to make state-owned enterprises profitable and
more efficient+ Public-sector employees may face the loss of perks associated with
public employment including high salaries, job security, opportunities for per-
sonal rent-seeking, and prestige+32 For these workers FDI can result in a net loss
of income+ Thus, it is possible that privatization’s losers may be particularly opposed
to FDI inflows+33

Explaining FDI Preferences: Empirical Tests

A growing body of research in comparative and international political economy

utilizes public opinion data to test the consistency of preferences with predicted

29+ Hainmueller and Hiscox 2006+

30+ Scheve and Slaughter 2004+
31+ Aguiar and Gopinath 2005+
32+ For example, Branstetter and Feenstra 2002 demonstrate that China protected state-owned firms
from FDI-induced competition+
33+ The net effect of privatization facilitated by FDI depends on whether the expected increase in
real income due to FDI exceeds the forgone perks of public employment+ Even if expected wage increases
could exceed forgone perks, former public employees would have to be sufficiently skilled to realize
these wage increases+
 Labor Markets and Demand for Foreign Direct Investment 397

distributional effects+ Individual policy preferences can be directly linked to salient

demographic information regarding education, employment, and geographic loca-
tion+ By contrast, indirect measures of preferences based on political behavior are
much noisier due to the influence of interest groups and political institutions on
observed behavior+34 Following this research I use survey data to test whether pref-
erences for FDI inflows are consistent with FDI’s predicted effects on individual
income+ Data are from the Latinobarometer, an annual public opinion survey con-
ducted in eighteen Latin American countries+35 This survey is unique among the
prominent multicountry survey projects in that it regularly includes questions on
attitudes toward FDI inflows+36 The surveys draw representative samples in each
country and inquire about a wide range of political and social topics+ Surveys from
1995, 1998, and 2001 included questions about FDI preferences+ The 1995 and
1998 surveys ask: “Do you consider that foreign investment, in general, is benefi-
cial or is it harmful to the economic development of the country?” Respondents
replied “beneficial” or “harmful+” 37 fdi beneficial is a binary variable equal to 1
if the respondent answered “beneficial+”
The 1998 and 2001 surveys ask a different but related question: “Do you strongly
agree, agree, disagree, or strongly disagree with the phrase: foreign investment
should be encouraged?” promote fdi is equal to 1 if the respondent replied agree
or strongly agree+38 The use of two different questions, both of which are present
in the 1998 sample, mitigates concerns about framing effects by allowing compar-
isons across the two questions for the same sample+39
Labor’s skill level is the central source for FDI preferences+40 As is standard in
empirical work on economic preferences, I use respondents’ level of education as

34+ Rodrik 1995+

35+ Latinobarometer countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador,
El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Vene-
zuela+ The 1998 and 2001 surveys include all eighteen countries+ Eight countries were in the 1995
survey: Argentina, Brazil, Chile, Mexico, Paraguay, Peru, Uruguay, and Venezuela+
36+ The survey project is well-regarded but until recently was not used widely because of strict
limits on access+
37+ For all survey questions, nonresponses ~for example, “I do not know”! are treated as missing
values+
38+ Results are unchanged using a four-category, ordered version of this variable+ Although some
might argue that “foreign investment” refers to all forms of capital investment, not just FDI, this ref-
erence is unlikely given that the Spanish version of these questions refer to “la inversión extranjera,”
which clearly connotes FDI+
39+ The first question arguably has a positive frame in that it emphasizes FDI’s potential to promote
economic development+ Hiscox 2006 shows, however, that positive framing effects do not bias responses
to survey questions about international trade+ Another possible concern with the first question is that it
inquires about FDI’s effects on the country overall rather than on the respondent+ This type of broad
framing is common to virtually all survey questions used in research on international economic policy
preferences+ A previous version of this article uses a Mexican survey question that inquires about FDI
effects for the respondent specifically and draws the same substantive conclusions+
40+ Unfortunately, there are not more detailed data on respondents’ labor market characteristics such
as industry of employment or rural versus urban location+ There are many observable implications to
the theory that could be tested with these additional data+ To my knowledge, there is no multicountry
survey that includes both this detailed information and questions about FDI preferences+
398 International Organization

a proxy for skill+ There is, however, some disagreement over the most appropriate
measure of educational attainment+ Rather than choose among them, I use three
distinct measures of education, each of which captures a somewhat different aspect
of the same underlying concept+ years of education measures the respondents’
number of years of schooling ~up to sixteen years!+41 This measure assumes a strictly
linear effect of education on skill level+ By construction each additional year of
education is assumed to have the same effect on the probability of FDI support+
Scheve and Slaughter measure educational attainment in this way+42 A different
approach is to use the highest level of education completed as the proxy for skills+
I construct two variables on this basis+ education level is a four-category vari-
able that is equal to 0 for less than a primary school education ~including illiter-
ate!, 1 for completed primary school, 2 for compulsory secondary education, and
3 for completed higher education+43 This measure collapses educational attain-
ment into ordered categories but preserves the assumption that a shift between
any two categories has the same effect+ Finally, I construct four separate indicator
variables for whether the respondent’s highest level of education is: a university
degree, a partial university education ~ended without a degree!, postsecondary voca-
tion training, and secondary school completed+ The omitted group is all educa-
tional attainment less than secondary school completion+ Hiscox and Hainmueller
use a series of indicator variables like this to estimate the distinctive effects of a
university education on preferences+44
I examine the influence of job security on FDI preferences using responses to
the question: “Which is your degree of concern about being without a job or being
unemployed in the next 12 months?” job insecurity is a four-category variable
for which higher values correspond to greater concern about job security+ The
expected sign is ex ante unclear; there are plausible theoretical arguments that
yield opposite predictions+ The coefficient represents FDI’s net effect on employ-
ment volatility, controlling for FDI’s effects on wages+
Occupational information provides proxies for additional alternate explana-
tions+ public employee is a binary variable equal to 1 for respondents employed
in the public sector+ Privatization and FDI are tightly linked because governments
often sell state-owned firms to foreign firms who have the requisite capital and

41+ There is no information about postgraduate education but given that the top category accounts
for less than 10 percent of respondents across the samples there appears to be little risk of underesti-
mating the effects of higher education+
42+ Scheve and Slaughter 2001b+
43+ Survey responses distinguished between partial and completed schooling+ For each level of
schooling respondents could also report incomplete school ~for example, began higher education
but did not complete!+ Those who report attaining an incomplete education are coded at the next
lower level ~for example, a respondent who reported incomplete higher education is coded as having
completed secondary school!+ This coding creates a bias against a statistically significant effect of
education+
44+ Hainmueller and Hiscox 2006+
 Labor Markets and Demand for Foreign Direct Investment 399

expertise to operate these firms as profitable enterprises+ Respondents employed

in the public sector are more likely to oppose FDI on these grounds+45
I estimate a series of probit models to consider the relationship between these
variables and the probability of support for FDI inflows+ All models include con-
trols for respondents’ basic demographic characteristics: female, equal to 1 if the
respondent is a woman; age, the respondent’s age; and married, equal to 1 if the
respondent is married or cohabitating+ Models also include country-fixed effects
to control for the myriad of country-level factors that can influence preferences+ I
first estimate a set of baseline models to test core hypotheses using all three years’
data+ I then exploit the richness of individual surveys to test the robustness of core
propositions to different measures of key variables and additional sources of FDI
preferences+ Table 1 provides summary statistics for all variables+

Empirical Results

The baseline model estimates, summarized in Table 2, demonstrate a consistently

positive and statistically significant relationship between skill level and support
for FDI+ This relationship is robust to the use of different measures of educational
attainment as a proxy for the expected return to FDI inflows+ Models with sepa-
rate estimates for different levels of education show that the probability of sup-
porting FDI inflows increases with more education, often quite dramatically+
Respondents who have completed university are, depending on the sample, between
7 and 10 percentage points more likely to support FDI inflows than those who
have not completed secondary school+46 Those who have completed secondary
school and have no further education are 3 to 4 percentage points more likely to
support FDI relative to those who have not completed this level of schooling+
The significant findings for educational attainment below a university degree
support an income-based explanation over an information or socialization expla-
nation+ Recall that Hiscox and Hainmueller single out a university education as a
source of both socialization and information about economic flows+47 A positive
and significant coefficient for only the university completed variable would have
supported a nonmaterial explanation+ A factor income explanation is more likely
given that the support for FDI is robust across educational levels+
The results are mixed for the alternate channels of FDI’s income effects+ job
security is statistically significant for only the 1998 sample, for which it has a

45+ This is the best approximation of which respondents are at risk of losing rent income following
FDI+ A more pointed measure, such as whether the respondent is employed by a state-owned firm, was
unfortunately not asked in the survey+
46+ All expected probabilities are statistically significant at least at a 5 percent level+ Calculated
based on Table 2, Models 3, 6, 9, and 12 estimates+ All expected probabilities reported are calculated
with CL ARIFY ~Tomz, Wittenberg, and King 2003!+
47+ Hainmueller and Hiscox 2006+
400 International Organization

TABLE 1. Summary statistics

Variables 1995 1998 2001

fdi beneficial 0+797 0+775 0+754

~0+401! ~0+417! ~0+431!
fdi encouraged 0+780
~0+414!
years of education 9+246 7+819 7+819
~4+758! ~4+302! ~4+928!
education level 1+355 1+237 1+209
~0+914! ~0+888! ~0+896!
university completed 0+098 0+112 0+062
~0+297! ~0+315! ~0+241!
vocational training 0+106 0+099 0+071
~0+308! ~0+298! ~0+256!
incomplete university 0+094 0+108 0+088
~0+291! ~0+310! ~0+283!
secondary completed 0+233 0+192 0+222
~0+422! ~0+394! ~0+416!
writing & numbers 0+073 0+029
~0+260! ~0+169!
works in office 0+067 0+057
~0+250! ~0+231!
homeowner 0+689
~0+463!
national pride 2+474 2+549
~0+738! ~0+728!
right partisanship 5+496 5+574 4+605
~2+628! ~2+955! ~3+465!
job insecurity 0+811 2+088 1+822
~1+192! ~1+005! ~1+222!
public employee 0+101 0+098 0+087
~0+301! ~0+298! ~0+282!
female 0+527 0+513 0+509
~0+499! ~0+500! ~0+500!
age 38+733 38+148 38+546
~15+842! ~15+160! ~16+007!
married 0+598 0+575 0+558
~0+490! ~0+494! ~0+497!

Notes: Each cell reports the variable mean and, in parentheses, its standard deviation+

negative effect on the probability of support for FDI+ The substantive effect of job
insecurity is quite small compared to educational attainment+ Similarly, public
employment has the predicted negative effect but it is statistically significant in
only some specifications+ The negative sign on the coefficient is consistent with
the theoretical claim that public employees are vulnerable to a loss of rents when
FDI occurs in conjunction with privatization+
Although a control variable, female merits brief discussion given its consis-
tently negative and statistically significant coefficient+ Across the three sample years,
TABLE 2. Baseline results

1995 1998 2000

P~fdi beneficial ⫽ Y! P~fdi beneficial ⫽ Y! P~fdi encouraged ⫽ Y! P~fdi encouraged ⫽ Y !

Variables Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Model (7) Model (8) Model (9) Model (10) Model (11) Model (12)

years of education 0+029** 0+032** 0+028** 0+014**

~0+003! ~0+005! ~0+005! ~0+003!
education level 0+149** 0+146** 0+120** 0+075**
~0+014! ~0+024! ~0+021! ~0+019!
university completed 0+286** 0+375** 0+276** 0+201**
~0+055! ~0+063! ~0+069! ~0+066!
vocational training 0+242** 0+187** 0+153* ⫺0+031
~0+075! ~0+045! ~0+068! ~0+053!
incomplete university 0+197** 0+206** 0+260** 0+109
~0+054! ~0+061! ~0+065! ~0+061!
secondary completed 0+156** 0+116** 0+103** 0+090**
~0+044! ~0+041! ~0+036! ~0+034!
job insecurity ⫺0+007 ⫺0+003 ⫺0+003 ⫺0+063** ⫺0+062** ⫺0+063** ⫺0+044** ⫺0+045** ⫺0+044** ⫺0+022 ⫺0+022 ⫺0+022
~0+015! ~0+014! ~0+014! ~0+017! ~0+017! ~0+017! ~0+016! ~0+015! ~0+016! ~0+014! ~0+014! ~0+013!
public employee ⫺0+013 ⫺0+034 0+000 ⫺0+045 ⫺0+038 ⫺0+049 ⫺0+094 ⫺0+088 ⫺0+092 ⫺0+097** ⫺0+114** ⫺0+108**
~0+073! ~0+089! ~0+082! ~0+042! ~0+040! ~0+038! ~0+051! ~0+049! ~0+048! ~0+033! ~0+036! ~0+036!
female ⫺0+193** ⫺0+173** ⫺0+186** ⫺0+161** ⫺0+162** ⫺0+162** ⫺0+163** ⫺0+164** ⫺0+163** ⫺0+121** ⫺0+122** ⫺0+122**
~0+050! ~0+049! ~0+048! ~0+038! ~0+038! ~0+038! ~0+039! ~0+039! ~0+039! ~0+027! ~0+027! ~0+027!
age 0+002 0+002 0+001 0+001 ⫺0+000 ⫺0+001 0+003** 0+002* 0+002* 0+001 0+001 0+001
~0+001! ~0+001! ~0+001! ~0+001! ~0+001! ~0+001! ~0+001! ~0+001! ~0+001! ~0+001! ~0+001! ~0+001!
married 0+132** 0+101* 0+138** 0+054 0+049 0+054 0+012 0+007 0+017 0+026 0+026 0+027
~0+045! ~0+047! ~0+052! ~0+036! ~0+036! ~0+036! ~0+029! ~0+028! ~0+031! ~0+033! ~0+033! ~0+033!
Observations 6759 7199 6427 15011 15011 15011 15220 15220 15220 16526 16526 16526

Notes: Probit coefficients with robust standard errors clustered by country in parentheses+ All models include country fixed effects+ * significant at 5% level; ** significant at 1% level+
402 International Organization

women are between 4 to 6 percentage points less likely than men to support FDI
inflows+ There are no theoretical reasons to suggest why women are consistently
opposed to FDI inflows+ This result echoes findings on trade policy preferences
that women are consistently more protectionist+48
These baseline results demonstrate reasonably well that factor price effects influ-
ence support for FDI inflows+ I undertake a series of robustness tests to further
explain influences on FDI attitudes+ The 1995 and 1998 surveys provide alternate
measures of skills+ One question inquires: “In your job, do you spend a lot of time
writing or working with numbers?” A second question asks: “Do you work in an
office?” Both questions capture dimensions of skill that may not derive from for-
mal education but are nonetheless skills that multinational firms demand+ In par-
ticular, these measures can capture skills gained through work experience+ The
low correlation between these variables and education confirms that they are con-
ceptually distinct from formal education: for the 1998 sample there is a less than
+01 correlation between a university education and each of the alternate measures;
for the 1995 sample this correlation is approximately +06 for both variables+ writ-
ing & numbers equals 1 for respondents who either write or use numbers regu-
larly in their work+ works in office equals 1 for respondents who work in an
office+ Both of these variables should have a positive relationship with support for
FDI inflows+ Table 3 reports model estimates using these alternate measures of
skill+ Both proxies of skill are positively correlated with support for FDI inflows
at conventional levels of statistical significance in five of the six models+49 These
findings further demonstrate that returns to skills, broadly construed, explain sup-
port for FDI+
A final set of robustness checks draws on the richness of the individual surveys
to specify expanded models that include a wider range of potential influences on
FDI preferences+ Briefly, I examine three additional factors using data for those
survey years which included appropriate proxies+ First, Scheve and Slaughter show
that home ownership is a distinct channel through which international economic
flows influence individual income+50 To the extent that FDI flows improve local
economic conditions, they raise the value of geographically fixed assets like real
estate+ Model 1 in Table 4 includes homeowner, a binary variable equal to 1 if
the respondent is a homeowner+51 The estimated coefficient is positive and statis-
tically significant, supporting the importance of asset ownership in shaping eco-
nomic preferences+

48+ See O’Rourke and Sinnott 2001; and Mayda and Rodrik 2005+ Burgoon and Hiscox 2008 offer
the explanation that women have a protectionist bias because they are less likely to be informed about
economic policies+
49+ The coefficient on works in office in Model 6 is estimated less precisely than in the other
models; its p-value is +07+
50+ Scheve and Slaughter 2001b+
51+ This test is necessarily less precise than Scheve and Slaughter’s because home ownership can-
not be interacted with a measure of FDI’s economic effects for the respondent’s community+
 Labor Markets and Demand for Foreign Direct Investment 403

Second, existing research points to the negative influence of national pride on

support for international economic flows+ This argument is closely related to ear-
lier discussion of the socializing effect of education; individuals with a strong pro-
fessed attachment to their country are perhaps wary of foreign influences+ The
1995 and 2001 surveys provide another way of assessing this class of effects+ These
surveys include the question: “How proud are you to be [nationality]? Are you
very proud, fairly proud, a little proud, or not proud at all?” From responses to
this question I construct a four-category variable ranging from 0 to 3; higher val-
ues indicate a stronger sense of national pride+ Models 1 and 4 in Table 4 include
the variable national pride+ Consistent with existing findings, both coefficients
are positive but only in Model 1 is it statistically significant+ This provides limited
confirmation of nationalism’s effects on economic preferences+ For all of the rea-
sons that trade might be an affront to nationalist sentiment, FDI should evoke even
stronger opposition+ The absence of a large, robust effect of nationalism on FDI
preferences is notable because it disproves the common assertion that nationalism
motivates opposition to FDI+

TABLE 3. Alternate measures of returns to FDI

1995 1998

P~fdi beneficial ⫽ Y ! P~fdi beneficial ⫽ Y ! P~fdi encouraged ⫽ Y !

Variables Model (1) Model (2) Model (3) Model (4) Model (5) Model (6)

writing & numbers 0+157* 0+173** 0+204**

~0+077! ~0+063! ~0+076!
works in office 0+123* 0+145* 0+096
~0+059! ~0+058! ~0+053!
job insecurity ⫺0+013 ⫺0+009 ⫺0+128** ⫺0+127** ⫺0+094** ⫺0+088*
~0+034! ~0+035! ~0+033! ~0+032! ~0+035! ~0+035!
public employee 0+025 0+016 ⫺0+006 ⫺0+021 ⫺0+061 ⫺0+075
~0+106! ~0+101! ~0+036! ~0+039! ~0+052! ~0+049!
female ⫺0+202** ⫺0+200** ⫺0+159** ⫺0+159** ⫺0+167** ⫺0+176**
~0+042! ~0+041! ~0+041! ~0+041! ~0+042! ~0+039!
age ⫺0+001 ⫺0+001 ⫺0+002 ⫺0+002 0+000 0+001
~0+001! ~0+001! ~0+001! ~0+001! ~0+001! ~0+001!
married 0+106* 0+111* 0+045 0+039 0+015 0+007
~0+047! ~0+046! ~0+037! ~0+039! ~0+028! ~0+028!
Observations 6907 6911 14457 14222 14649 14409

Notes: Probit coefficients+ Robust standard errors clustered by country in parentheses+ All models include country
fixed effects+ * significant at 5% level; ** significant at 1% level+

Third, studies of public opinion regularly find that a respondent’s political party
exerts influence on preferences by providing informational cues and the pressure
TABLE 4. Expanded models of FDI preferences

1995 1998 2001

P~fdi beneficial ⫽ Y ! P~fdi beneficial ⫽ Y ! P~fdi encouraged ⫽ Y ! P~fdi encouraged ⫽ Y !

Variables Model (1) Model (2) Model (3) Model (4)

university completed 0+433** 0+397** 0+287** 0+194**

~0+039! ~0+060! ~0+064! ~0+066!
vocational training 0+296** 0+185** 0+145* ⫺0+034
~0+092! ~0+046! ~0+072! ~0+053!
incomplete university 0+226** 0+199** 0+268** 0+106
~0+047! ~0+071! ~0+070! ~0+062!
secondary completed 0+139 0+104* 0+089* 0+091**
~0+073! ~0+048! ~0+042! ~0+033!
job insecurity 0+000 ⫺0+060** ⫺0+041* ⫺0+024*
~0+015! ~0+017! ~0+018! ~0+012!
public employee ⫺0+025 ⫺0+022 ⫺0+055 ⫺0+112**
~0+056! ~0+043! ~0+054! ~0+037!
homeowner 0+058**
~0+021!
national pride 0+151** 0+044
~0+033! ~0+031!
right partisanship 0+044** 0+002 0+002 0+010
~0+009! ~0+008! ~0+009! ~0+006!
female ⫺0+213** ⫺0+155** ⫺0+164** ⫺0+122**
~0+041! ~0+035! ~0+047! ~0+026!
age ⫺0+000 ⫺0+001 0+001 0+001
~0+001! ~0+001! ~0+001! ~0+001!
married 0+129** 0+057 0+024 0+028
~0+045! ~0+039! ~0+034! ~0+033!
Observations 4796 12155 12317 16397

Notes: Probit coefficients+ Robust standard errors clustered by country in parentheses+ Constant omitted+ Country fixed effects included+ * significant at 5% level; ** significant at 1%
level+
 Labor Markets and Demand for Foreign Direct Investment 405

to remain loyal to the party+52 Accordingly, partisan affiliation may independently

influence preferences for FDI inflows+ All four models in Table 4 include the vari-
able right partisanship, a variable that indicates where on a 0 to 10 scale of
partisanship a respondent places herself; higher values correspond to the political
right+ I do not have ex ante expectations about the expected sign of coefficients+
Partisanship in Latin America is sufficiently complex that a simple equation of
right parties with capital’s preferences and of left parties with labor is ill-advised+53
Only in Model 1 does partisanship have a statistically significant effect while the
coefficients on the education variables remain substantively larger and precisely
estimated+ This shows that even when partisanship is correlated with preferences,
it does not subsume income’s influence on preferences+

Conclusion

This article has illuminated a new dimension of the political economy of FDI: the
sources of individual preferences for FDI inflows+ Using three years of extensive
public opinion data from eighteen Latin American countries, I have shown that
FDI preferences are consistent with FDI’s distributional effects: support for FDI
inflows increases with respondents’ skill level+54 This finding is robust to a variety
of alternate explanations for preferences including concerns about job security and
opposition to privatization; evidence for these alternatives is, at best, limited+ These
findings also speak directly to the role of ideas in the formation of preferences for
international economic flows+ Previous work on trade and immigration prefer-
ences shows that education informs and socializes individuals to be more recep-
tive to international influences, independent of the expected effects of these flows
on income+ By contrast, I find no evidence to support these alternate mechanisms
by which education could influence preferences+
These findings have clear implications for how politicians in emerging markets
can build support for greater international economic integration+ They show that,
at least for FDI, individuals are persuaded by the economic benefits of openness+
This robust support for FDI belies causal accounts of opposition to FDI that is
rooted in populism and xenophobia+ To be sure, there are instances of such oppo-

52+ Kaufman and Zuckerman 1998+

53+ Stokes 2001+
54+ One could question how generalizable the results are given that the survey data are for Latin
American countries+ Latin America currently has some of the highest level of export-oriented FDI as
percentage of total FDI inflows+ This is due largely to its proximity to the United States+ East Asia has
similarly high levels of export-oriented FDI due to its relatively low labor costs and proximity to
multiple manufacturers in the region+ Many other regions of the world, and certainly advanced indus-
trialized economies, have a higher proportion of market-oriented investment than the export-oriented
variety+ Given that market-oriented investment increases returns to labor in two ways, higher wages
and lower prices for consumer goods and services, all else equal, one would likely see more robust
support for FDI among labor in these other parts of the world+
406 International Organization

sition but they are the exception rather than the rule+ Efficiency-minded politi-
cians can tap into the broad support for FDI among labor to build a constituency
in support of economic integration with the world+ In particular, any government
efforts to expand education will have the additional payoff of building support for
integration+ By securing this support for initial inflows of FDI, politicians can pave
the way for the realization of long-term potential benefits of FDI including eco-
nomic growth and development+
These findings suggest some new lines of inquiry into the sources of inter-
national economic policy preferences+ For the study of FDI preferences, the next
step includes testing nuanced hypotheses about different types of FDI using dis-
aggregated data on individuals’ exposure to investments+ This is a formidable task
given the paucity of accurate data on FDI flows but a worthwhile one that would
yield many useful insights into the relative importance of ideas and income in the
formation of preferences+ For example, exposure to FDI into natural resource extrac-
tion is likely to elicit very different preferences than FDI into technologically
advanced, export-oriented manufacturing industries+ Another aspect ripe for study
is how the substantive relationship between different kinds of economic flows influ-
ences preferences+ As noted in the introduction, trade and FDI flows are linked+
Sometimes they are complements, as in the case of export-oriented FDI, and other
times they are substitutes, as seen in market-oriented FDI+ Survey work can uncover
how much voters perceive these interdependencies and internalize the conse-
quences of one type of economic policy for other forms of international economic
activity+
Finally, the theory and findings presented in this article establish the analytical
foundation for a larger research program on the political economy of FDI demand+
This broader research agenda includes explanations for special interest coalitions
and lobbying activities related to FDI, patterns in formal FDI regulations, and inter-
national cooperation pertaining to FDI+55 Why should international relations schol-
ars be interested in the politics of FDI demand? The study of FDI speaks powerfully
to the foundational questions of the discipline, including who comprise the win-
ners and losers from international economic integration and variation in how coun-
tries balance the opportunities and risks of international economic integration in
their policy choices+ FDI occupies a central role in the international economy and
drives other prominent forms of economic activity like international trade+ To claim
that one understands the politics of global integration, one needs to be able to explain
the politics of FDI demand, which is still overlooked in the current understanding
of international affairs+ This research is also necessary to specify more accurate mod-
els of trade, finance, and other types of economic activity that intersect with FDI+
Perhaps the greatest promise of this research is that it illuminates the political
choices that inform how to harness the potential of international economic integra-
tion to fuel economic development+ By deploying the well-established analytical

55+ See Pandya 2007, for complete discussion of these issues+

 Labor Markets and Demand for Foreign Direct Investment 407

traditions of international political economy to the politics of FDI demand, schol-

ars stand to gain tremendous new insight into international economic integration
more generally+

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